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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

Kaveri Infra Ltd obtained a bank DPG for the purchase of equipment from Orbit Machines. The company defaults on the third instalment and Orbit invokes the guarantee. Which sequence of consequences is most accurate?

The bank pays Orbit the due amount on invocation and then recovers it from Kaveri Infra under its reimbursement obligation. Default is the very event the guarantee covers, so it does not lapse, and the bank need not wait for the seller to sue the borrower first.

  1. AThe bank must first sue Kaveri Infra and win before paying Orbit
  2. BThe guarantee lapses because the principal debtor defaulted
  3. CThe bank pays Orbit the due amount as per the guarantee and then recovers it from Kaveri Infra, which has an obligation to reimburse itCorrect
  4. DOrbit must recover from Kaveri Infra and the bank pays only the interest

Explanation

The bank's liability is independent and arises on invocation in line with the guarantee terms; it need not wait for the seller to sue the buyer. After paying, the bank recovers the amount from the borrower under the counter-indemnity or reimbursement arrangement, typically converting the contingent liability into a funded advance. Default is precisely the event the guarantee covers, so it does not lapse.

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